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January 08, 2006

Reviving Philadelphia Through Tax Abatements?

Today's New York Times has a summary of an interesting tax abatement program that's been used by the City of Philadelphia since 1997 to encourage redevelopment of the city's shrinking core. If a developer renovates or redevelops an old abandoned warehouse into residential property, the property keeps its pre-renovation value, for tax purposes, for 10 years. For property in run-down urban neighborhoods, this works out to be a sweet deal. In 2000, the program got expanded to include new construction anywhere in the city limits. So since 2000, if you build a new home in Philly, all you're paying taxes on is the land. For the next ten years. No matter how rich you are.

On one level, this is clearly a good thing: in most of our oldest cities around the northeast, the inner core has been steadily losing population to the suburbs for decades. And this tax abatement is being given a lot of credit for helping to change that. Most people agree that the best antidote to suburban sprawl is a thriving inner city, so if this tax break is helping achieve this goal, that's a really good outcome.

But there's a downside. First, according to a Philly Inquirer article, this tax break is now costing the city $30 million a year. Second, not to sound like a broken record, but every special tax break is really a tax shift, forcing someone else to foot a little bit more of the bill. The long-time homeowners who lived in Center City during the declining years of the city aren't getting a tax break from this provision. In fact, as the area becomes more desirable and their assessed values shoot up, they're paying more property taxes. When the long-term residents are paying exponentially more property taxes than newly gentrifying yuppies, it's hard to see how that satisfies anyone's definition of fairness.

Parenthetically, Washington DC has had a somewhat similar but better-targeted tax break in place since 1997. It's a $5,000 federal income tax credit for first-time homebuyers who purchase a home in certain areas of the District. It's a one-shot deal-- you get the credit the year you buy the house. And if your income exceeds a certain limit ($130,000 for a married couple), you don't get the credit. This study by the Fannie Mae Foundation calls the program a "success" because the nearly 22,000 people who claimed this credit between 1997 and 2001 represented about 77% of all the homes bought in the District during this period! This beats the Philly break on two counts: it's only for first-timers, and it has an income limit.

There are unanswered questions about both cities' approaches, though. As a first-time homeowner who bought in DC in 1998, I can testify that the housing boom was really getting underway by the time I made my home-buying decision-- and it's certainly never stopped since. The first thing I thought when I heard about this tax credit was that sellers were probably adding $5,000 to their asking price for any home they sold. If sellers are the ones getting this tax break in the end, it's hard to see why (in a hot real estate market) that's a good idea.

In Philly, the same sort of question can be asked (and, according to the Inquirer article, is being asked) about their tax abatement. Once a real estate market becomes hot, as Philadelphia's center city apparently has, general tax abatements may no longer be necessary to get people to buy. And sellers may be capitalizing some of the value of the abatement into higher sales prices for these homes.

As with any tax break that's contingent on your behavior, the critical question is whether people are really changing their behavior to get these breaks. A lot of DC folks (myself included) would have bought with or without the $5,000 credit. And at this point, I bet a lot of retro lofts are being built in downtown Philly that would find a quick buyer whether there was a tax abatement or not.

At the very least, this sort of program should have an income limit so that the tax abatement is made available only to those new (first-time?) home-owners for whom the prospect of paying property taxes on their purchase is enough of a deterrent to keep them from buying.

Philadelphia-- and Pennsylvania-- have bigger property tax-related fish to fry, of course. Having a good circuit-breaker style low-income property tax credit in place could help mitigate some of the tax shift (to long-time residents) the abatement is likely causing. But the way things are now, it sounds like redevelopment in Philly's Center City doesn't need training wheels anymore-- which means that the only real impact of this break these days is to enrich the gentrification classes at the expense of long-time city homeowners and renters.

1 Comments:

I live in Philadelphia and consider the abatement program to be an usual success for the city. It works precisely because it's not targeted. Construction costs in the city are much higher because of powerful unions and a bureaucratic L&I. Rather than address these issues (which never would have happened) they effectively provided an incentive to build. Bear in mind $30 million isn't a whole lot of money given the overall budget and, more importantly, it does not exempt it's residents from paying the city onerous wage tax now at 4.33%. City revenues have been increasing ever since so shift it may, but our overall tax burden is decreasing not increasing. Wage taxes have been cut every year since the late 1990's yet revenue is going up. this is because higher income folks are moving in. higher income people pay more in wage taxes than they would in prop taxes AND only new or substantially (unlivable) properties are eligible. consequently, abated properties are either converted empty warehouses.offices or forerly vacant land. If Philly wants a tax cut, get rid of the municipaly mismanaged gas utility.

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